FIN 588 | Session 1-3 | Foundations and Frontiers of Corporate Finance Research

FIN 588 | Session 1-3 | Foundations and Frontiers of Corporate Finance Research Summary This is an overview of the optional readings for Sessions 1-3. The sources examine the evolution of corporate finance from the Modigliani-Miller irrelevance propositions to complex frameworks that incorporate agency costs and incomplete contracts, where ownership is primarily defined by residual rights of control. Research indicates that a firm's capital structure is often remarkably stable over decades, typically driven by unobserved time-invariant effects or historical market timing rather than current optimal trade-offs. Debt maturity and seniority are strategically used to manage creditor conflict and control, yet shorter maturities can paradoxically worsen debt overhang during future periods of financial distress. Real-world investment efficiency is further affected by headquarters' proximity to plants and the "WACC fallacy", a common error in which managers destroy value by applying a unique discount rate to diverse projects. Furthermore, while the prevalence of secured debt has declined alongside improvements in accounting transparency, corporate decisions such as dividend payments are often driven by managers catering to fluctuating investor sentiment regarding stock characteristics.